RBI Repo Rate Cut in March 2020 – Would you really get Benefited?

Today, the RBI Governor, Shaktikanta Das has announced an RBI Repo Rate cut by 0.75% / 75 basis points. RBI has cut the repo rate several months. Huge interest rate cut by 0.75% brings down home loan, auto loans and corporate loans. Who would get benefited from this RBI Repo Rate cut now in March 2020? Who would really get benefited with 3 months moratorium on EMIs on the loans taken?

Highlights of RBI Press Conference in March 2020

Stock market investors and investors in mutual funds are trying to protect their investments due to the panic that is being created due to Covid-19. Amidst this, today RBI had a press conference where it announced repo rate cut and several other measures to counter the economic slowdown due to Covid-19 / corona virus situation.

1) RBI repo rate (in simple terms, it is, Short Term Lending Rate) has been reduced from 5.15% to 4.4%, a reduction of 0.75% / 75 basis points. This is a powerful move by RBI as it would reduce the cost of the funds.

2) The reverse repo rate has been cut by 90 basis points to 4%. The RBI Governor indicated that this has been done to make it unattractive for banks to passive deposit funds with the RBI and instead lend it to the productive sectors.

3) Cash Reserve Ratio (CRR) has been cut by 100 basis points / 1%. This would help the banks, especially private sector banks have more money. With this move, it would release Rs 137,000 crores across the banking system. This would help banks for financial stability.

3) Accommodation under the Marginal Standing Facility (MSF) to be increased from 2% SLR to 3% with immediate effect till the end of June, 2020. It will release Rs 1.37 lakh crore into the banking system with this move.

4) Due to corona virus, money markets are facing severe pressures from redemptions by mutual fund investors. The targeted Long-term Refinancing Operations (TLTRO) will give cash to banks, which they are supposed to invest in investment-grade bonds, commercial paper, etc. This will be reassuring for the money markets, ensuring they don’t seize up.

Commenting on this, Prime Minister, Mr. Modi indicated that RBI has taken giant steps to safeguard our economy from the impact of Corona Virus and it would improve liquidity, reduce the cost of funds and it would help the middle-class and businesses.

Who would benefit from RBI Repo Rate Cut?

Don’t think you would automatically get benefitted unless you read the complete details.

1) The RBI Repo rate cut would benefit individuals or companies who have taken home loans on floating rate interest rate. Due to this, there would be an increase in household cash flow.

2) RBI has permitted commercial, rural and regional banks, NBFCs, small financial banks, and other financial institutions give 3 months moratorium on payment of EMIs for the loans outstanding as on 31st March, 2020. However, this is at the discretion of the banks or financial institution, i.e. they have final say on this. They can say YES or NO.

3) If such banks or financial institutions would not deduct EMIs on the loans, CIBIL score also would not get affected.

Whom does this 3 month moratorium on EMIs would apply?

Such moratorium would apply for home loans, personal loans, car loans, two wheeler loans and corporate loans taken till 31st March, 2020.

However, credit card dues would not fall under this as these would not fall under loans bucket. You can check if you can convert your large credit card payments into EMIs before 31st March, 2020 and there are chances that you can get this exemption for 3 months. But verify this with your bank if they are providing such moratorium and if these are applicable for such conversion.

Who are the losers with RBI Repo Rate Cut?

Don’t think everyone benefited with such move. There are losers too.

1) Whenever there is repo rate cut, stock markets always react negatively. We have seen instances where FII’s start pulling money from stock market. While we do not depend entire on FII investments in Indian stock markets, we should accept the fact that they drive the stock market on key occasions like when there is RBI repo rate cut. Today when RBI has announced its repo rate cut, stock markets already down, however rebounded back in positive. I expect negative momentum would continue for a few more days (beyond Coronavirus impact which we are seeing).

2) These repo rate cuts would bring down the interest rates. There are several mutual fund schemes like liquid mutual funds or overnight mutual funds and other short term funds, etc., which would fall due to increase in interest rates.

3) FD interest rates are expected to reduce. If you (especially Senior Citizens who depend on fixed interest income) are planning to invest in FDs, do it right away before banks announce reduction in FD interest rates.

Conclusion: RBI measures like repo rate cut and 3 months moratorium on loans is a good move during his global recession due to covered-19. The Repo rate cut is good for loan borrowers as home loans, auto loans and personal loans and corporate loans would be cheaper. Also 3 month moratorium is welcome news. However, these are at the discretion of the banks or financial institution. How many banks are passing the rate cut to you is the question. Also, instead of leaving the decision to banks / financial institutions about 3 months moratorium, RBI would have made it mandatory for all banks or financial institution to implement this. Wait for your bank or financial institution to announce them and then you can give cheers to these measures as an individual. Otherwise, this would definitely boost the economy and help in current situation.

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I have done my Post Graduation in Finance. I have over 20 years of experience in analyzing various investment options and money saving ideas. I love doing financial planning, Mutual Fund Analysis, Searching long term Stocks for wealth creation, IPO Reviews, Analyzing Life Insurance and Health insurance Plans etc.

3 Comments

Dr Banmeet

Sir
Pleases inform a detailed analysis of whether one needs to/should pay his her home loan EMI and the credit card bills as per the recent announcement by the hon’ble finance minister. And if yes how should it be done if one is not using NetBanking